good afternoon and welcome to prime interest i'm perry i'm boring and i'm bob english and here's today's headlines it's been a week of scandal it looks like j.p. morgan will settle with the feds for allegedly manipulating energy markets and exiting the commodities market all together this comes after a threat of another federal probe then big beer goes after big banks for manipulating the price of aluminum used for an unknown halliburton pleads guilty to pulling an enron and destroying evidence related to the two thousand and ten b.p. gulf of mexico spill they will pay a fine of up to two hundred thousand dollars but just to put this in perspective that's roughly point zero three percent of their six hundred seventy nine million dollars reported annual revenue and anthony weiner's wife a human abdeen is in the news that senator chuck grassley is investigating her activities while she worked for hillary clinton when she changed her name her official title and became

a quote special in government employee and she was able to take on private clients and guess where she words none other than the firm founded by bill clinton and former british prime minister tony blair a firm called suniel will be involved would be for a man simply didn't mention that john corliss hangs in the open to one hundred thousand dollars a month and consulting just prior to blowing up m.f. global ocean city you connecting any related dots on this one by the way the muni market is under the microscope no that detroit is under bankruptcy court protection thanks to the earth zero interest rate policy by chairman bernanke going on five years no pension funds and hedge funds alike have been searching for higher yielding us it won't be the best to believe you to do this but bond such as those issued by detroit and know that prices are falling as well as liquidity meaning it's harder to find buyers for these increasingly distressed assets so it looks like our favorite casandra very good with the. it was just

a couple of years too early. and here's west and you are. under current basel three proposals within the next five years banks will have to hold equity equal to three percent of assets this means that for every one dollar of capital a bank can basically loan or gamble on derivatives thirty three times that amount earlier i spoke with robin berry a former investment banker with credit suisse and a corporate finance executive and i asked her about leverage during the financial crisis and the expansion of the derivatives market. all of the banks got in trouble

in financial crisis because of the bets they place in the mortgage market and the securitization that happened from that we saw just last year j.p. morgan have a trading loss that they first could along the way and a five and started as a loss of you know some they thought that their loss was two billion then it became six billion. and that's just one example of something that can't be valued if they don't know their total risk which is hard for for even the banks to know at any given time you know well and we have capital management stevie cohen's for our firm is facing charges allegations of insider trading wire fraud and the hedge funds are leveraged to the hold to i think they had thirteen billion dollars under management but they actually had forty four billion dollars at risk and what you're saying if i understand is that when we have a systemic panic it's that higher number it's like the total leverage amount that really matters leverage is the key and i think we're going to talk about that.

leverage is for the lay person leverage is about borrowing someone else's money to make an investment ok and in general we are familiar with from the experience for props of buying a house you take the money from the bank you go ahead and buy your real estate or your house and you hope that the price increase and if it does and you pocket the difference you get capture that equity and i'm screwed if it works yeah that's the power of leverage but it's not just that the banks are taking money from the fed or from other borrowed sources and investing in an asset and hoping that it increases they're using that borrowed money to make bets they're doing leverage vegas style so they have the ability to take that money and place these bets interest rate swaps derivatives of all kinds futures options trading securitization it can multiply very quickly and we actually have a chart of leverage that i'd like to pull up right now and this kind of illustrates exactly what you're talking about. here we what is it federal reserve is right at the top sixty two to one what does that mean amazing which but they are in the

business of loaning money they are in the business of debt and so when you look at the balance sheet there is somewhere around three point four trillion in liabilities and only about fifty five billion in. capital right most of the banks are around thirty to one prior to the two thousand and eight crisis they've come down since they've increased some of their reserves some of the regulatory agencies are pushing them to continue to increase their reserves which seems crazy . i think it doesn't matter because in the in the at the end of the day the leverage ratio is still extremely high road and whether it's twenty to one or thirty to one they're still going to be able to do many of the activities that got them into trouble in the first place and let's take a look at that there was a mcdonald's at the very end their leverage ratio is zero point seven five. right i mean for corporate america that we do when you look at the difference between the banking industry and the corporate america you see a complete two totally different pictures in. american for the fortune five hundred

that i work for we were responsible debt so our debt to equity ratio was reasonable and you can see there from the chart that mcdonald's has way less debt than they have equity so you're saying the makers don't pose systemic risk i guess you could say that ok so let's talk about the federal reserve and their role in all of this how how do they fit into this grand scheme they're doing quantitative easing but how do they enabled the derivatives industry and all these other players to get so big yeah i mean the fed is able to pump money into the system in a number of ways it can make loans to banks through the discount window it can buy treasuries. they can do a lot of programs and like you he has been going on for a couple of years now by keeping interest rates near zero and especially the inner bank rate which has been near zero for quite a while i think it's like point two five. could you explain how these low interest rates are the economy and the ability of these banks and other people to make money

sure i mean with the banks having that competitive advantage they literally are able to borrow that money way less than anyone else can and they can put it to work in the derivatives market or other investments they can place bets and hope to multiply their profit which you know is. inflated to the degree that it doesn't make sense i mean compared to how rest of corporate america has to operate right what about the big banks versus the smaller banks like the community banks the savings well you know the. sure smaller banks are at a disadvantage the large banks obviously because there is an implicit and explicit guarantee by the fed i mean they can stay in the media and they will talk about not wanting to save the banks and not wanting to step in again that they would do yeah but they have to get their hands are tied the system is geared towards that that size which we looked at in the in the beginning of a talk. we're talking about the entire size of the u.s.

economy resting on these banks they can't afford to let it to let it be at risk so they would they would step in if they had to well let's talk about their mandates they actually have three mandates most people only talk about two of them you know you have maximum employment you have price stability which actually means inflation but also moderate long term interest rates how does that fit right moderate interest rates i don't think you can call moderate interest rates and zero interest rates and the interbank rates that are as low as they have been are not historically. the norm so we've got to get our way back to what is a moderate interest rate and which can benefit the savings side of the equation not just the debt side. that was my interview with former investment banker with credit suisse and corporate finance executive robin berry now following up on our discussion about interest rates let's look at in historical example of interest rate fixing among two central banks in the lead up to the great depression for more

on this we turn to prime interest producer justin underhill justin can you walk exactly through what happened during the early one nine hundred well we have a graph here of the english economy from one thousand nine hundred through one nine hundred thirty the green line if the value of pounds in terms of gold the lower the line the last. in the les gold you would receive for each pound the yellow line is the price index ranging from zero to thirty well england was on the gold standard the price level was fairly constant so it's going up until nine hundred fourteen so during world war one nine hundred fourteen thousand nine hundred eighteen england effectively doubled its money supply causing the price index to increase substantially as we see it right here during this time they also suspended the gold standard as they were too many pounds in circulation to be redeemed for gold so even though we showed that the price level of the gold is fairly constant rate here you couldn't redeem your currency for gold at that time after the war the english

central bank wanted to return to the gold standard and remember the number of pounds circulating in the economy had doubled but the amount of gold hadn't changed the only way to return to a gold standard prewar levels would be to contract the money supply and this was done by raising interest rates increasing savings but when interest rates shot up to seven percent in the early one nine hundred twenty s. unemployment also rose with high unemployment rates the only way england could attract gold into the country and expand the money supply would be to have a trade imbalance where they were x. supporting more than they were importing but because the price index as we see right here in the one nine hundred twenty s. didn't drop substantially not supreme where levels english goods were still fairly expensive compared to american goods gold flowed out of england and went to the us setting the stage for me ger problems in the one nine hundred twenty s.

so let's break this drone just steam what were some of the issues that were friends that they were all there is a massive amount of gold that had gone to the us from europe so it wasn't just england that was facing these problems and so in august of one thousand nine hundred seven three officials from three different central banks. so it would be the bank of england and france and germany headed to the u.s. and they urged the u.s. to lower the fed to lower its interest rates and this was very good that they did that this was for that purpose the idea that the fed lowered interest rates in the u.s. the u.s. would be a less favorable place to invest the fed lowered rates in one thousand twenty seven from four to three point five percent and many economists believe that this actually fueled a lot of the speculation right before we saw the great depression you had one of the one of the economies view at that time well there's actually an economist at the federal reserve who said it quote this was in one thousand thirty four the greatest and boldest operation ever undertaken by the federal reserve system and it

resulted in one of the most costly errors committed by its or any other banking system in the last seventy five years and many economists do believe that this the fed lowered these interest rates that actually encouraged the speculative finance that we saw leading up to the great depression or are we just about twenty seconds but what about returning to a gold standard today now would that be possible today i don't know some people like jim rickards say that it might be but that would be for international settlements not necessarily redeeming all your currency and gold exactly thank you justin you've been wonderful coming up periods been blowing bubbles on the old woman on the campaign trail she'll be going to the fine print of this economic speech is straight to the point out what that's about and i will do all are two very own tom part of the big picture over the dysfunctional banking system now we go from the all in one to right through the great depression into the bottom presidential panic. you know sometimes you see

a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize that everything you thought you don't. like is a big. i've seen the perception of the cross many times it doesn't matter if there's snow a heat wave or hail stones from people keep on going i don't expect anything just one i told myself i keep on going as long as my heart told me to that's all i want to at the moment mickey i have send so my cheese cd i'm carrying these sayings on my shoulder. do you want me to put a bandage shared no that's fine

a lot of people were so exhausted they could barely walk their feet hurt and some of them fainted google really back to it three two wanted to keep going i don't know what tomorrow will bring. nobody chooses to be homeless no one chooses to me and now sorrow. isidro's for the show to. get in the six pm get out six p. six. they were a. school that. had to me the class before the. days that were against the work. it's tough to think about all of them comes of it. and to know that many may not have only been the last two won't should never be but there are also

do different closures that never should have. so this week kicked off president obama's campaign to fix our economy and he's on the trail giving stump speeches to motivate us to invest in our future days before the launch the white house created a fan fair of anticipation the assistant to the president dan pfeiffer e-mailed the entire u.s. press saying you're going to want to watch this speech in just hours before obama's

appearance at knox college white house press secretary jay carney got a little tip on morning joe building the wonderment of what obama's speech would be about but afterwards the media didn't find it all that exciting the new yorker said boring is not bad but i would concur with that then speaker boehner said obama is wearing out his arguments. creature enough to be bold says will no streak that's assuming that there is an actual left after you've repeated this many times. on that note let's dig into the fine print of obama nomics to see what it was all about first he points out that we are on a dangerous to a directory of wealth as a patient in the wealth gap the gap between the middle and upper class can tenure to widen since two thousand and nine the average c.e.o. pay raise has increased forty percent all while the average american earns less

today than they did in one thousand nine hundred ninety he calls this a winner take all economy. all of it not just a result. inequality of opportunity. this growing inequality it's not just morally wrong it's bad economics. because when middle class families have less to spend guess what. businesses have fewer consumers. one will concentrates at the very top it can inflate unstable bubbles that threaten the economy. so according to obama bubbles are the riches fault so while romney and warren buffett are distracting the president what they're both the federal reserve have their hands compressing interest rates to a store close fueling tons of money into the financial sector this coupled with government policies that supported housing initiatives some of which obama voted for when he was in congress helped inflate the housing bubble you can't have

a bubble without middle class participation the one percent were buying the securities that made up of the ninety nine percent it wasn't the richest fault it was the system and please wealth concentration is simply a side effect of a bubble not the cause and you can't fix the problem if you don't know the cause but don't worry because the white house has a better bargain for the middle class that's the name of his plan and he went so far as to say that whatever executive authority i have to help the middle class all use it so if congress won't pass the borg until the hill probably by executive action to get its way but that's one of the perks of being the president the details of his better bargain have not been spelled out but the website says it will include housing because owning a home has always been at the heart of the american dream maybe that's true what americans don't want to relive the nightmare of the housing collapse and the economic plan also includes health care obama's theory is that the new health care

legislation is also going to stimulate the economy because the middle class families deserve the security of knowing they have access to affordable health care when they get sick however as over forbes points out in the vast majority of stays the affordable care act has the net effect of raising premiums a lot which has given rise to the term rate shock but the paradox is that the affordable care act is so overreaching it stretches into the department of education and the i. economic plan also includes education which obama calls the single most important investment we can make in our middle class but what he fails to mention is one of the relatively unknown provisions of obamacare took over the private student loan industry and today it's the government has made almost nine million dollars from student loan interest payments and all of that money is going to find obamacare as seems as though the better bargain leaves us better off to bargain with our hope and change than our dollars and cents that's what's in the

fine print of obama nomics up next as the daily deal. i am joined today with tom hartman of the upon misleading named the big picture with tom hartman thank you so much for joining me here let's listen to our first story elizabeth warren's proposal to reinstate a form just a form of glass steagall which was the separation of commercial banking from investment banking it's going to quite a bit of attention this got us thinking about depression era reforms what are your thoughts on this whole part of the one nine hundred twenty s. generally investment banks and commercial banks were different not by law but just generally didn't work in the one nine hundred twenty one election warren harding arguably one of those libertarian presidents american history will was elected on

the platform of less business and less government business more business and government and started deregulating the banks drop the top tax rate and seventy five down to twenty five percent etc etc and banks started opening at the rate of two to three a day through the twenty's most of them were under funded and most of the more enthusiastic to help people with the two great you ways to get rich which was speculating in real estate and speculative stock market stock market went from sixty three sixty just. eight years and then of course that whole little fantasy world of deregulated banks been so wonderful crashed glass steagall it we were permanently high plateau didn't work out did it it took it until one hundred fifty five before the stock market got back up that was in twenty nine and you mention hard even though there was a mini depression during that area and some would say the austrian camp say that because you actually did nothing that solved the problem and there's another argument that the fed was actually printing too much money throughout the one nine

hundred twenty s. in order to serve the interests of great britain and that's what fueled part of the speculative boom that there was too much money kind of like what it would feel the housing boom that we saw in two thousand and five has to be possible one zero harding was at hearing of the gold standard i mean one of the problems that we had with the great depression was that the united states would only take payment in gold from other countries and we had a current account surplus and so it was depressing trade and continue to press trade right up until until thirty three because we would only take payment gold and we had we had basically cornered the world's supply of gold the gold standard was slowing things down well let's talk about the depression itself in one nine hundred twenty nine nine hundred thirty we had herbert hoover come in and there's a lot of argument about he did absolutely nothing to prevent the great depression from actually happening but he instituted a number of things like smoot hawley and he actually negotiated with with

a number of large corporations to freeze wages and there is an argument that could be made that the freezing of wages while actual prices decline consumer prices decline was one of the proximate causes of the of the great depression yeah i think it's nonsense the you know there was a there was a small effort around the edge first of all smooth. four percent increase in our tariffs from thirty one to thirty four something like that it was relatively meaningless it changed our balance of trade and our total trade by less than a percent i mean was it was irrelevant i would like to point to it if it had very little to do with anything and in fact it was decades later that i got basically recalibrated number two with regard to his his trying to negotiate with businesses it was largely unsuccessful anyway it was in fact up by the force of law so it was about to part of the force of law but wages were sticky at those times oh yeah well even had a major problem in one nine hundred twenty seven you had this housing bubble that had grown all out of proportion

a little early people down in florida standing on street corners from blocks and blocks selling house flipping houses day by day i mean it was it was insane speculation that bubble burst in florida in twenty seven it started bursting all the way up the east coast through a twenty eight burst big time in california in late twenty eight in early twenty nine and that burst in the housing bubble just like our housing bubble burst in two thousand and seven here in the united states when to get out of you i made myself in florida so it sounds kind of like a repeat of the it exactly is and that's really the thing that drove the stock market crash was the housing market crash because the two ways that people were getting rich was speculating on housing and speculating on stocks and when they could no longer speculate in housing and so they started then speculating on stocks they could spot speculative stocks with huge margins you know ten to one margins you couldn't do housing with that kind of margin really those margins in the margin calls came in you know the whole thing price yeah it is about leverage and steve kean when we had him on our show had a really interesting graph of the incredible correlation between margin and stock

prices but what i want to get to is glass steagall is my my position is look i i am all for it if we're going to keep our current banking system then we have to you know we have to have some kind of limit on derivatives but unfortunately we're not going to have any realistic expectation even if volcker rule comes into effect even if we have. reincarnation of glass steagall almost a federal reserve stops printing and giving away this free money to the banks because there's too much money at stake to really have any real reform because the people who are instituting these reforms supposedly are the ones who are regulating who are the ones who are writing the rules like j.p. morgan well we could go through a long list of what's wrong with the fed but i don't think the fed is the problem here really what we're talking about with glass steagall is separating gambling banking investment banking from checkbook banking old fashioned commercial banking you know if you have a checkbook you have a savings account if your mortgage with the bank and from nine hundred thirty from

the founding of the republic until nine hundred thirty five we never went more than fifteen years without a major national banking anik in one hundred thirty five we put into place glass steagall which said you have to choose if you want to be a bank either you're like merrill lynch and you're an investment house and you gamble in the stock market with your money and with other people's money or your like you know bank of america and we're used to be and you just take checkbook accounts and what that got blown up in ninety nine with with graham leach bliley and the consequence of that was that these two merge so now you've got banks they can take your deposits and go out and gamble with them on wall street and i think that's not only do i think that's wrong but that's what crashed the system we need to go back to saying to the banks you can be one or the other pick tom we're out of time i wish we had another ten minutes for this thank you so much for joining if you want to weigh in on today's show be sure to like us on facebook at facebook dot com slash prime interest and you can follow tom at tom underscore hartman you can follow me that english thank you so much for joining me on today's daily dose.

and it was a day of connect the dots here on prime interest here is the tangled web we get woven from j.p. morgan however in to that still unknown clinton baier firm new holdings it's worth the first domino in a trail that leads west to chicago the bond market never lies finally retraced a q e two derivatives and then blazed a trail that led us to our favorite gangster here's looking at you diamond thanks for watching come back next week from everyone at prime interest i'm sorry i'm boring have a great day. your

government is still persisting in honoring besides that most people around the world would have absolutely no confidence and one argument here is that the reason the rebels have become jihadists and of accepted money due to how these fools have been so sure is precisely because the west is not prepared to provide them with weapons. that church is essential. killed in the streets. that women kidnapped and converted to islam.